Large-scale structure has benefits

Animal agriculture's structure has changed "dramatically" in the last 20 years as cattle feeding and hog and poultry production have transitioned to fewer but larger operations, but the change has benefited sustainability, producers and consumers, according to Dr. James MacDonald, chief of the U.S. Economic Research Service's (ERS) Agricultural Structure & Productivity Branch.

Source: Feedstuffs; By: Rod Smith | Apr 06, 2009

Animal agriculture's structure has changed "dramatically" in the last 20 years as cattle feeding and hog and poultry production have transitioned to fewer but larger operations, but the change has benefited sustainability, producers and consumers, according to Dr. James MacDonald, chief of the U.S. Economic Research Service's (ERS) Agricultural Structure & Productivity Branch.

MacDonald, in keynoting the annual meeting of the National Institute for Animal Agriculture in Louisville, Ky., last week, reviewed an ERS report published earlier this year on "The Transformation of U.S. Livestock Agriculture."

In addition to operation size, he said the transformation has included new production technologies, specialization and tighter vertical coordination, the last of which has decreased dependence on the cash, or spot, market.

The effects of this transformation have been increased productivity -- increased production using far less labor, land and natural resources than would be needed otherwise -- and decreased food prices to consumers, MacDonald said. However, he acknowledged that the impact also has included decreased competition and intense concerns related to air and water pollution.

MacDonald noted that the ERS report focused on the beef and dairy cattle industries and on the chicken and hog production sectors. He reported that there are about the same number of beef cow farms/ranches and chicken integrators today as there were in 1987 but far fewer dairies, feedlots and hog operations.

As for size, he said the "midpoint" for a typical dairy in 1987 was 80 head, whereas today, it's 550 head; similarly, feedlots went from 17,500 head to 35,000 head per yard, hog operations went from 1,200 head to 30,000 head and chicken complexes went from 300,000 birds to 600,000 birds.

"There has been a dramatic change in the size of farms," MacDonald said.

The driver of this shift in size was a need to develop economies of scale as the larger operations became, the more they could decrease costs on an annualized-per-animal basis and increase returns (Figures 1-2), he said, adding that there is "a pretty powerful" relationship between economies of scale and efficiency and profitability.

MacDonald did note that this relationship varies within size classes, but still, there is "a big difference across classes."

He said contracting and coordination have also played a role in helping producers achieve efficiency and profits and, in fact, keeping many moderate-sized producers in the business, as has demand growth. Attempts to influence structure through policy have had no impact -- "not even a small impact," he added.

As for consumer prices, MacDonald laid out a number of charts showing that consumer-level prices for dairy, meat and poultry have consistently trailed economy-wide price increases as livestock and poultry production has moved to large-scale and more efficient farms and feedlots (Figures 3-5). Consumer prices for dairy, meat and poultry have risen 1.6% per year, while economy-wide prices for other goods and services have risen 3% per year, he said.

However, on the flip side, he showed that agricultural input costs have often exceeded economy-wide cost increases, while prices paid to producers for milk, meat, poultry and processed foods have lagged behind the general economy, which has made it necessary for producers to continue growing larger to establish increasing economies of scale, leading to consolidation of production into fewer but larger operations.

MacDonald said the fewer-but-larger trend also applies to packers/processors, with basically four major buyers of fed cattle, two to four major buyers of hogs and a handful of chicken integrators that contract production with local farmers. However, he said the marketplace has remained competitive.

Even though there are only four major packers that buy fed cattle, for instance, prices paid to feedlots are as competitive as they would be if there were 20 packers, according to the ERS analysis, although he suggested that if the JBS USA acquisition of National Beef Packing Co. had succeeded, a shift in buying power could have resulted.

For contract growers in the chicken and hog sectors, the marketplace is more one of "grower services" than livestock, he said, which does present some unique concerns in that growers can get "locked into long-term investments" in housing and suddenly thrown into short-term contracts if integrators need to restructure, which is happening now in the chicken industry.

As for environmental risks, MacDonald said manure volume creates concerns related to air and water contamination, but large operators are addressing this by expanding field and pasture bases on which manure is spread and developing new markets and uses for manure, e.g., for energy.

He also said large operators will find that meeting requirements of the rule for their concentrated animal feeding operations (CAFO) will be fairly easy and inexpensive. He said the CAFO rule and other permitting requirements and regulations at local and state levels -- and even lawsuits -- will not alter the current structural trends in livestock production.